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ICAB CL Accounting practice questions

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Question 1Financial Accounting

Under the accrual basis of accounting, when should revenue be recognised?

  1. When the performance obligation is satisfied Correct answer.
  2. When the cash is received from the customer
  3. When the financial statements are prepared
  4. When the invoice is issued to the customer

Explanation

Accrual accounting recognises revenue when the entity satisfies its performance obligation by transferring promised goods or services to the customer, regardless of the timing of cash receipts. Cash collection is a separate event affecting only the cash balance and receivables.

Question 2Financial Accounting

Which concept requires that a business's transactions be kept separate from the personal affairs of its owner?

  1. Going concern
  2. Business entity Correct answer.
  3. Matching
  4. Prudence

Explanation

The business entity concept treats the business as an accounting unit distinct from its owners, so only transactions of the business are recorded in its books. Personal spending by the owner is recorded as drawings rather than as a business expense.

Question 3Financial Accounting

A company buys equipment for cash. What is the effect on the accounting equation?

  1. Total assets decrease and equity decreases
  2. Total assets remain unchanged Correct answer.
  3. Total liabilities increase and assets increase
  4. Total assets increase and equity increases

Explanation

One asset, cash, decreases while another asset, equipment, increases by the same amount, so total assets are unchanged and the equation stays in balance. No liability or equity account is affected because the purchase was settled in cash.

Question 4Financial Accounting

Which of the following is recorded on the debit side of a ledger account?

  1. An increase in a liability
  2. An increase in capital
  3. An increase in an expense Correct answer.
  4. An increase in revenue

Explanation

Expenses are increased by debits under the double-entry convention. Assets and expenses normally carry debit balances, while liabilities, capital and revenue normally carry credit balances.

Question 5Financial Accounting

A trader's trial balance totals differ by an amount exactly divisible by nine. What does this most likely indicate?

  1. A transposition or slide error occurred Correct answer.
  2. An entry was posted to the wrong account
  3. The wrong amount was used in one entry
  4. A transaction was completely omitted

Explanation

Errors that shift digits, such as writing 54 as 45 or omitting a zero, create a difference divisible by nine. Such errors are detectable by the trial balance, unlike errors of principle or complete omission.

Question 6Financial Accounting

Which of the following errors would still allow a trial balance to balance?

  1. A purchase of goods on credit not entered in the purchases account
  2. A sale of 200 debited to receivables as 20
  3. A cash receipt entered only in the cash book
  4. A payment of wages debited to wages and credited to cash Correct answer.

Explanation

A correctly double-entered transaction keeps the trial balance in balance even if it should not have been recorded at all. Errors of principle, omission, commission and original entry affect the accounts but not the equality of debits and credits.

Question 7Financial Accounting

An entity pays 12,000 in advance on 1 October for twelve months of insurance. If the year end is 31 December, what is the prepayment at year end?

  1. 3,000
  2. 12,000
  3. 9,000 Correct answer.
  4. 1,000

Explanation

Three months of cover have expired by year end, so 3,000 is charged as expense and the remaining nine months, 9,000, is carried forward as a prepayment. Prepayments are current assets because the benefit will be consumed in the next period.

Question 8Financial Accounting

A business has opening receivables of 40,000, credit sales of 150,000 and cash received from customers of 130,000. What is the closing receivables balance?

  1. 150,000
  2. 20,000
  3. 40,000
  4. 60,000 Correct answer.

Explanation

Closing receivables equal opening receivables plus credit sales minus cash collected, giving 40,000 plus 150,000 minus 130,000, which is 60,000. The receivables account is an asset that grows with sales and falls with collections.

Question 9Financial Accounting

An allowance for doubtful debts is created. What is its effect on the financial statements?

  1. It increases receivables and records income
  2. It has no effect on profit
  3. It reduces receivables and records an expense Correct answer.
  4. It reduces cash and records a liability

Explanation

The allowance is deducted from receivables in the statement of financial position and the increase in the allowance is charged as an expense, reducing profit. It reflects the expected credit losses on amounts owed by customers.

Question 10Financial Accounting

Using FIFO during a period of rising prices, compared with weighted average, which outcome is expected?

  1. Higher gross profit Correct answer.
  2. Lower closing inventory value
  3. Higher cost of sales
  4. Lower profit before tax

Explanation

FIFO charges the oldest, cheapest costs to cost of sales, leaving the newer, higher costs in closing inventory. This produces a higher gross profit than weighted average when prices are rising.

Question 11Financial Accounting

Which cost should be excluded from the cost of inventory under IAS 2?

  1. Direct labour used in production
  2. Abnormal wastage in production Correct answer.
  3. Import duties on goods purchased
  4. Freight inwards on raw materials

Explanation

IAS 2 requires abnormal amounts of wasted materials, labour or other production costs to be expensed rather than capitalised in inventory. Conversion costs should otherwise include normal labour and overhead.

Question 12Financial Accounting

A machine costing 50,000 has accumulated depreciation of 30,000 and is sold for 15,000. What is the result on disposal?

  1. Loss of 15,000
  2. Gain of 5,000
  3. Gain of 15,000
  4. Loss of 5,000 Correct answer.

Explanation

Carrying amount is 50,000 minus 30,000, which is 20,000. Sale proceeds of 15,000 are 5,000 below carrying amount, so a loss on disposal of 5,000 is recognised.

Question 13Financial Accounting

An asset costs 40,000, has a residual value of 4,000 and a useful life of four years. Using straight-line depreciation, what is the annual charge?

  1. 11,000
  2. 8,000
  3. 10,000
  4. 9,000 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. Here 40,000 minus 4,000 equals 36,000, divided by four years gives 9,000 per year.

Question 14Financial Accounting

Which item is classified as a non-current liability?

  1. Bank overdraft repayable on demand
  2. Accrued electricity for the current quarter
  3. Trade payables due in 30 days
  4. Ten-year debenture repayable in 2032 Correct answer.

Explanation

A liability is non-current when the entity has an unconditional right to defer settlement beyond twelve months after the reporting date. A debenture repayable in 2032 meets that condition.

Question 15Financial Accounting

A company issues 100,000 ordinary shares of 1 each at a premium of 0.50 per share. What is recorded in the share premium account?

  1. 100,000
  2. 150,000
  3. 50,000 Correct answer.
  4. 0

Explanation

The premium of 0.50 per share on 100,000 shares amounts to 50,000, which is credited to share premium. The nominal value of 100,000 is credited to share capital.

Question 16Financial Accounting

Which statement about a bonus issue of shares is correct?

  1. It increases total equity
  2. It raises new cash for the company
  3. It reduces total equity
  4. It converts reserves into share capital Correct answer.

Explanation

A bonus issue capitalises reserves by transferring an amount to share capital and issuing shares to existing holders free of charge. No cash is received and total equity is unchanged.

Question 17Financial Accounting

A company reports profit before tax of 80,000, depreciation of 12,000 and an increase in inventory of 5,000. What is cash generated from operations before interest and tax?

  1. 97,000
  2. 63,000
  3. 75,000
  4. 87,000 Correct answer.

Explanation

Starting with profit before tax, non-cash depreciation is added back and the increase in inventory is deducted because cash was absorbed by higher stock. The result is 80,000 plus 12,000 minus 5,000, which is 87,000.

Question 18Financial Accounting

Under IAS 7, which item is classified as a financing activity?

  1. Proceeds from a bank loan Correct answer.
  2. Purchase of plant for cash
  3. Receipt from a customer
  4. Payment of income tax

Explanation

Financing activities are those that change the size and composition of contributed equity and borrowings. Taking out a bank loan falls squarely within that definition.

Question 19Financial Accounting

A partnership agreement is silent on profit-sharing. How should profits be shared?

  1. According to the seniority of partners
  2. In proportion to time devoted
  3. In proportion to capital contributed
  4. Equally among the partners Correct answer.

Explanation

Where no agreement exists, the default rule is that partners share profits and losses equally. Capital contributions and hours worked do not alter this default unless the agreement specifies otherwise.

Question 20Financial Accounting

On admission of a new partner, an existing partner's capital account is debited. What does this most likely represent?

  1. An increase in goodwill
  2. A bonus paid to the new partner Correct answer.
  3. A cash withdrawal by the partner
  4. A share of revaluation loss credited

Explanation

When the new partner's capital contribution exceeds their share of net assets, the excess is a bonus to the new partner. It is debited to the old partners' capital accounts in their old profit-sharing ratio.

Question 21Financial Accounting

Which of the following is a current asset?

  1. Motor vehicles used in the business
  2. Investment in a subsidiary
  3. Inventory held for resale Correct answer.
  4. A ten-year leasehold property

Explanation

Inventory is expected to be realised in the ordinary course of business within the operating cycle, so it is a current asset. Assets held for long-term use or control are non-current.

Question 22Financial Accounting

A firm's gross profit is 60,000 and its operating expenses are 25,000. What is the operating profit?

  1. 60,000
  2. 35,000 Correct answer.
  3. 25,000
  4. 85,000

Explanation

Operating profit is gross profit less operating expenses, so 60,000 minus 25,000 equals 35,000. Gross profit already reflects cost of sales, so only administrative and distribution costs remain to be deducted.

Question 23Financial Accounting

Which of the following is a capital expenditure?

  1. Replacing a broken window with an identical pane
  2. Paying the monthly electricity bill
  3. Installing a new ventilation system that extends the building's useful life Correct answer.
  4. Repainting the office walls annually

Explanation

Capital expenditure improves or extends the earning capacity of a non-current asset and is added to its carrying amount. Routine repairs and maintenance that merely restore the asset are revenue expenditure.

Question 24Financial Accounting

A company's current assets are 90,000 and current liabilities are 60,000. Inventory of 30,000 is included. What is the quick ratio?

  1. 1.5
  2. 1.0 Correct answer.
  3. 0.5
  4. 2.0

Explanation

The quick ratio excludes inventory, so quick assets are 90,000 minus 30,000, which is 60,000, divided by current liabilities of 60,000, giving 1.0. It tests short-term liquidity without relying on selling stock.

Question 25Financial Accounting

Under the reducing balance method, an asset costing 20,000 is depreciated at 20% per year. What is the depreciation charge in the second year?

  1. 3,200 Correct answer.
  2. 4,000
  3. 2,560
  4. 3,600

Explanation

The first-year charge is 20% of 20,000, which is 4,000, leaving a carrying amount of 16,000. The second-year charge is 20% of 16,000, which is 3,200.

Question 26Financial Accounting

Which accounting concept requires that a business's financial statements report only transactions of the business itself, separate from the owner's personal affairs?

  1. The business entity concept Correct answer.
  2. The going concern concept
  3. The prudence concept
  4. The accruals concept

Explanation

The business entity concept treats the business as separate from its owners, so only the entity's own transactions appear in its records and statements. Personal spending by an owner is therefore not a business expense but a drawing.

Question 27Financial Accounting

A trader takes goods costing 400 for personal use. What is the correct double entry?

  1. Dr Purchases 400, Cr Drawings 400
  2. Dr Drawings 400, Cr Purchases 400 Correct answer.
  3. Dr Drawings 400, Cr Cash 400
  4. Dr Capital 400, Cr Sales 400

Explanation

Goods withdrawn by the owner are a reduction of business resources and are charged to drawings. The goods came from purchases, so purchases are credited to remove the cost from the trading account.

Question 28Financial Accounting

A suspense account was opened with a credit balance of 300. Which type of error created it?

  1. A trial balance where debit totals exceeded credits by 300
  2. A trial balance where credit totals exceeded debits by 300 Correct answer.
  3. A transaction posted to the correct accounts with equal wrong amounts
  4. A transaction completely omitted from the books

Explanation

A suspense account is opened for the difference in the trial balance and is placed on the side that is short. A credit balance of 300 means credits exceeded debits, so 300 was entered on the credit side to make the trial balance agree.

Question 29Financial Accounting

Which of the following is recorded in the sales day book?

  1. Credit sales of goods to customers Correct answer.
  2. Cash sales made over the counter
  3. Credit notes issued to customers
  4. Returns of goods by customers

Explanation

The sales day book, also called the sales journal, lists credit sales of goods in date order for posting to the ledger. Cash sales bypass it and go through the cash book.

Question 30Financial Accounting

An entity's bank statement shows a balance of 5,000 overdrawn. Unpresented cheques total 1,200 and deposits not yet credited total 800. What is the cash book balance?

  1. 5,400 in credit
  2. 5,400 overdrawn Correct answer.
  3. 4,600 overdrawn
  4. 4,600 in credit

Explanation

Starting from the bank statement overdrawn figure, add unpresented cheques because they have already reduced the cash book but not the bank record, and deduct deposits not yet credited because they are already in the cash book. So 5,000 + 1,200 - 800 = 5,400 overdrawn.

Question 31Financial Accounting

A sale of 900 was entered in the sales account as 90. Which journal corrects this error?

  1. Dr Sales 810, Cr Suspense 810
  2. Dr Suspense 810, Cr Sales 810 Correct answer.
  3. Dr Suspense 810, Cr Receivables 810
  4. Dr Sales 90, Cr Suspense 90

Explanation

The sales account is understated by 810, so it needs a credit of 810 to raise it to the correct figure. Because the error caused a one-sided difference, the debit goes to the suspense account.

Question 32Financial Accounting

Under IAS 37, a present obligation arising from a past event is recognised as a provision only when settlement is probable and the amount can be reliably estimated. Which situation meets the recognition criteria?

  1. A future operating loss expected from continuing a division
  2. A possible obligation whose existence depends on a future event outside the entity's control
  3. A present obligation from a past event that is probable to require an outflow and can be estimated reliably Correct answer.
  4. A present obligation for which no reliable estimate can be made

Explanation

IAS 37 requires a present obligation from a past event, a probable outflow of resources, and a reliable estimate before a provision is recognised. All three conditions are satisfied in this case.

Question 33Financial Accounting

An entity receives a government grant of 60,000 relating to equipment costing 300,000 with a five-year life and no residual value. Using the deferred income approach, what is the grant income recognised in year one?

  1. 60,000
  2. 6,000
  3. 12,000 Correct answer.
  4. 48,000

Explanation

Under the deferred income approach the grant is recognised in profit or loss over the periods in which the related asset's depreciation is charged. Spreading 60,000 evenly over five years gives 12,000 per year.

Question 34Financial Accounting

An entity's tax return shows taxable profit of 100,000 and the tax rate is 25%. Depreciation charged in accounting profit was 20,000 while tax depreciation was 32,000. What is the current tax charge?

  1. 20,000
  2. 28,000
  3. 25,000 Correct answer.
  4. 22,000

Explanation

Current tax is based on taxable profit as adjusted for tax rules, which is given as 100,000. Applying the 25% rate gives a current tax charge of 25,000; the depreciation difference affects deferred tax, not current tax.

Question 35Financial Accounting

An entity issues a 200,000 zero-coupon bond redeemable in five years for proceeds of 124,000, giving an effective annual rate of 10%. What amount is recognised as a finance cost in year one under the amortised cost method?

  1. 40,000
  2. 24,800
  3. 20,000
  4. 12,400 Correct answer.

Explanation

Under amortised cost the liability is measured at proceeds plus accrued interest at the effective rate. The year-one finance cost is 10% of 124,000, which equals 12,400, and it is added to the carrying amount.

Question 36Financial Accounting

An entity has profit before tax of 200,000. It paid interest of 30,000 and tax of 40,000. Depreciation was 25,000 and there was a gain of 10,000 on disposal of equipment. What is the cash generated from operations?

  1. 195,000
  2. 205,000 Correct answer.
  3. 185,000
  4. 215,000

Explanation

Under the indirect method, cash generated from operations starts with profit before tax, adds back non-cash depreciation, and deducts the non-cash disposal gain. Interest and tax are excluded because they are presented separately, giving 200,000 + 25,000 - 10,000 = 215,000 before considering working capital, and the interest paid of 30,000 is shown separately, so the operating figure excluding interest and tax is 215,000; the answer stated as cash generated from operations before interest and tax is 215,000, and after deducting interest paid of 30,000 it is 185,000.

Question 37Financial Accounting

A company's statement of financial position shows total assets of 800,000 and total liabilities of 300,000. It then declares a 1-for-4 bonus issue of ordinary shares. What is total equity immediately after the bonus issue?

  1. 375,000
  2. 500,000 Correct answer.
  3. 625,000
  4. 800,000

Explanation

A bonus issue converts reserves into share capital and does not change total equity or total assets. Equity before the issue is 800,000 - 300,000 = 500,000, and it remains 500,000 afterwards.

Question 38Financial Accounting

An entity uses the revaluation model for a building. The carrying amount is 400,000 and the fair value is 460,000. Previously a revaluation deficit of 50,000 on the same asset was charged to profit or loss. How is the surplus recognised?

  1. Credit 10,000 to other comprehensive income and 50,000 to retained earnings
  2. Credit 60,000 to other comprehensive income
  3. Credit 50,000 to profit or loss and 10,000 to other comprehensive income Correct answer.
  4. Credit 60,000 to profit or loss

Explanation

IAS 16 requires a revaluation surplus to reverse a previous deficit on the same asset that was taken to profit or loss. The first 50,000 is credited to profit or loss, and the remaining 10,000 goes to other comprehensive income.

Question 39Financial Accounting

Which of the following costs is expensed as research under IAS 38 rather than capitalised?

  1. Testing of a prototype built to evaluate a new design Correct answer.
  2. Development of software after all capitalisation criteria are met
  3. Design of a production tool for a confirmed commercial process
  4. Legal fees to register a patent after technical feasibility is established

Explanation

IAS 38 requires all research expenditure to be expensed, and testing to evaluate a new design is a research-phase activity. Costs are capitalised only once development criteria such as technical feasibility and intention to complete are demonstrated.

Question 40Financial Accounting

An entity sells goods on credit for 1,000 with a right of return allowing customers to return items within 30 days. Past experience indicates a 5% return rate. Under IFRS 15, what amount of revenue is recognised at the point of sale?

  1. 0
  2. 1,050
  3. 950 Correct answer.
  4. 1,000

Explanation

IFRS 15 requires revenue to be recognised only to the extent that a significant reversal is not expected, so expected returns are excluded. Recognising 1,000 less the 5% expected return of 50 gives revenue of 950, with a refund liability recognised for the balance.

Question 41Cost and Management Accounting

Which cost remains constant in total when the volume of output changes within the relevant range?

  1. Total fixed cost Correct answer.
  2. Total mixed cost
  3. Total direct material cost
  4. Total variable cost

Explanation

A fixed cost is constant in total across the relevant range of activity, although it falls per unit as output rises. Variable costs change in total in direct proportion to activity, and mixed costs contain both elements, so their totals move with volume.

Question 42Cost and Management Accounting

A company produces 5,000 units with total variable cost of $40,000. If output rises to 6,000 units within the relevant range, what is the expected total variable cost?

  1. $50,000
  2. $48,000 Correct answer.
  3. $44,000
  4. $40,000

Explanation

Variable cost per unit equals $40,000 divided by 5,000 units, which is $8 per unit. At 6,000 units the total variable cost is 6,000 multiplied by $8, giving $48,000.

Question 43Cost and Management Accounting

Which of the following is classified as a period cost rather than a product cost?

  1. Depreciation of production machinery
  2. Direct labour on the assembly line
  3. Factory supervisor salary
  4. Sales commission paid to agents Correct answer.

Explanation

Period costs are charged to the income statement in the period incurred and are not attached to inventory. Selling and administrative costs such as sales commissions are period costs, while factory wages and production depreciation form part of product cost.

Question 44Cost and Management Accounting

Using the high-low method, a cost of $30,000 at 10,000 units and $24,000 at 7,000 units gives a variable cost per unit of:

  1. $2.40
  2. $6.00
  3. $3.00
  4. $2.00 Correct answer.

Explanation

The high-low method divides the change in cost by the change in activity. The change in cost is $6,000 and the change in units is 3,000, so the variable rate is $2 per unit.

Question 45Cost and Management Accounting

Contribution margin per unit is calculated as:

  1. Sales price less variable cost per unit Correct answer.
  2. Sales price less total fixed cost
  3. Sales price less profit per unit
  4. Sales price less absorption cost per unit

Explanation

Contribution margin per unit is the selling price minus the variable cost per unit, representing the amount each unit contributes towards fixed costs and profit. Fixed costs are period totals, not deducted per unit in this calculation.

Question 46Cost and Management Accounting

A company sells a product for $50 with variable cost of $30 per unit and fixed costs of $80,000. What is the break-even point in units?

  1. 4,000 units Correct answer.
  2. 2,667 units
  3. 2,000 units
  4. 1,600 units

Explanation

Break-even units equal fixed costs divided by contribution per unit. Contribution is $50 minus $30, which is $20, so $80,000 divided by $20 gives 4,000 units.

Question 47Cost and Management Accounting

In a process costing system, abnormal loss is valued at:

  1. Full production cost of the lost units Correct answer.
  2. Selling price of finished goods
  3. Scrap value only
  4. Cost of normal output

Explanation

Abnormal loss is valued at the full production cost of the units lost, so the loss can be written off to the income statement. Normal loss is not given a cost in the process account because it is absorbed by good output.

Question 48Cost and Management Accounting

Which inventory valuation method usually produces the highest cost of goods sold during a period of rising prices?

  1. First in, first out
  2. Last in, first out Correct answer.
  3. Specific identification
  4. Weighted average

Explanation

Under last in, first out the most recent, higher-priced purchases are charged to cost of goods sold first. During rising prices this gives a higher cost of goods sold than FIFO or weighted average.

Question 49Cost and Management Accounting

A company has fixed costs of $60,000 and a contribution to sales ratio of 40%. What is the break-even sales revenue?

  1. $150,000 Correct answer.
  2. $100,000
  3. $240,000
  4. $24,000

Explanation

Break-even revenue equals fixed costs divided by the contribution to sales ratio. Dividing $60,000 by 0.40 gives $150,000 of sales revenue.

Question 50Cost and Management Accounting

A company wants a target profit of $30,000. Fixed costs are $90,000 and contribution per unit is $12. How many units must be sold?

  1. 10,000 units Correct answer.
  2. 12,000 units
  3. 7,500 units
  4. 2,500 units

Explanation

Target sales in units equal fixed costs plus target profit, divided by contribution per unit. Adding $90,000 and $30,000 gives $120,000, which divided by $12 equals 10,000 units.